Securities Litigation Blog


  • Aug 17, 2017
  • Glenn S. Gitomer
  • By Glenn S. Gitomer

During the course of my career, I have met too many people who have fallen victim to fraud by their trusted financial advisors.  Most prevalent among the financial frauds has been the Ponzi Scheme.

Ponzi Schemes are perpetrated by promoters, who gain the confidence of potential investors by claiming to have special access to a unique product or investment and insight that will produce risk-free returns at higher rates than are generally available to the investing public.  The promoter initially provides his customers with the remarkable returns promised, and, when word gets out about the success of this investment, existing customers want to increase their investment and new customers clamor to get on board.  What the customers don’t realize is that the “remarkable performance” they are observing is not the result of the success of the investment strategy.  In fact, there is no investment strategy.  The promoter is simply creating the illusion of performance by paying the promised returns from the investor’s own money and money from other investors, while stealing as much as possible. The scheme ultimately collapses when there is no longer enough money to pay the promised returns and meet investor redemption demands.  At that point, the promoter initially starts to give excuses about a “glitch” that is delaying returns and assures the investor that all issues are being quickly addressed.  After the stall wears thin, the Ponzi Scheme is exposed and the promoter gets carted off to jail, disappears or commits suicide, and the investors find themselves financially crushed.

As you would expect, victims of Ponzi Schemes are overcome with anger at the perpetrator. They are also overcome with feelings of guilt and remorse at loosing vast amounts of hard earned money by misplacing their trust.  I tell them to remember that the skills of a con shouldn’t be underestimated, that highly sophisticated investors have become victims of Ponzi Schemes, and they should not waste energy blaming themselves, who are the victims of the crime. 

While there is no foolproof way to prevent against being the victim of any crime, there are important red flags of a Ponzi Scheme that should cause an investor to beware.  Consider the following red flags:

  • WHO are the promoters/custodians/issuers?
    • The promoter’s background and experience. The promoter is offering a unique low-risk product promising exceptional returns.  A cardinal rule of investing is that investments have volatility and risk.  If the investment is so fool-proof, why is the promoter so blessed to have access to it and why isn’t it being offered to the general public by well recognized financial institutions? Check out the promoter on BrokerCheck and through an extensive Google search. Is there anything about the promoter’s background that would cause concern or lead you believe that the promoter isn’t a financial genius.
    • Is your investment in the custody of recognized broker-dealer?  If you believe that the promoter will be investing in securities (stocks, bonds, options, mutual funds) on your behalf, the assets must in the custody a registered broker-dealer. Are you being provided monthly account statements directly by the broker-dealer and do you have online access to these statements? Don’t trust account statements that come from the promoter.  They may be forged.  A reputable investment advisor knows that your assets must be in the custody of a registered broker-dealer and will have no problem providing access to your brokerage accounts holding your securities.
    • Beware of certificates of deposit not offered directly by federally insured banks.  Ponzi Scheme perpetrators often offer what they claim to be participation in certificates of deposit paying higher interest than is generally available.  They tell their victims that the higher interest rate is available because of their unique relationship with the bank and/or their ability to aggregate large amounts to invest. This is almost invariably a Ponzi Scheme.  Ask the promoter who the issuing bank is and to see the documents confirming the investment.  Contact the bank to see if they ever heard of the promoter or the product offered.  Contact your attorney or accountant to see if they think the documents look fishy.
    • Failure to get a straight answer.  If the promoter fails to respond fully to inquiries, avoids calls, gives fishy explanations about why funds aren’t forthcoming accompanied by promises that the temporary glitch is about to be righted, beware.  Ponzi Scheme promoters are skilled grifters who think they can play the investor like a violin.  They will greet you warmly, ask about your spouse and kids, tell you about their beloved family and all the wonderful work they are doing for charity, and talk about all the friends and interests you have in common.  If things aren’t looking right, don’t let the promoter change the subject. 
  • WHAT do the documents say?
    • How is your relationship with the promoter documented?  Legitimate investment advisors and broker-dealers have detailed customer agreements spelling out the terms of the engagement.  If the promoter purports to be your investment advisor, have you been provided with a customer agreement? If so, does it look like the kind of agreement you would expect from a sophisticated professional? 
    • How is your investment documented? Legitimate investments in private placements are well documented, disclose, among other things, risks of the investments, identity of the principals involved in the management and oversight of the investment, the investment strategy, and the investors right to redeem the investment.  Often, the private placement’s accountants and attorneys are identified.  The private placement memorandum ought to be accompanied by a subscription agreement, which requires the investor to represent that it has sufficient assets and/or income to qualify as an accredited investor.  If the documentation doesn’t seem to be in order, beware.
    • Payments, Account Statements and Tax Reporting Documents.  To whom is the promoter asking that your investment contributions should be made payable? They should never be made payable to the promoter.  If they are made payable to an entity, research to determine if that entity is anything more than a shell of the promoter.  Does it have a real office or is it just a mail drop? When you receive payments, who is the payee on the check. If they are from the account of the promoter or a shell controlled by the promoter, you should be concerned. Bank checks are particularly suspicious, since they fail to disclose who is the payee. Are account statements nothing more than a summary sheet prepared by the promoter?  Are you receiving K-1 or Misc. 1099s reporting tax gains, losses, dividends or interest in a timely matter?  Any irregularities in the accounting of the investment should be of immediate concern and be discussed with your attorney or accountant.

Does your investment have red flags? If so, please contact us.

McCausland Keen + Buckman represents investors in securities arbitration and litigation matters involving disputes with brokerage firms, investment advisors and other financial institutions. If you are an investor with concerns about your broker-dealer, your securities portfolio, or a particular investment, please contact us for an evaluation – at no cost or obligation to you. You may have a viable claim for recovery of your investment losses by filing an arbitration claim with FINRA, the Financial Industry Regulatory Authority. 


DISCLAIMER: Although McCausland Keen + Buckman always strives to provide accurate and current information, the foregoing is intended for general informational purposes only, shall not be construed as legal advice, and does not create or constitute an attorney-client relationship.

Glenn S. Gitomer

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Glenn S. Gitomer

Rated as “preeminent” by a leading survey for more than 25 years, Glenn represents defrauded investors and oppressed shareholders in derivative litigation.

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